Our Investment Philosophy
Please click here for a video presentation from Mark Travis on our investment philosophy.
Independence.
- We do not follow the herd on Wall Street because
- We buy only good businesses at good prices, using detailed fundamental analysis.
- We do not chase performance by buying into "hot" sectors or broad market trends.
- We typically are not correlated to benchmark indices because
- We have a concentrated portfolio consisting of our best ideas.
- We do not attempt to match our sector weightings to benchmarks.
- We are flexible and do not have cash limits.
Insight.
- We're driven by careful internal research, not external sell-side data.
- We focus on a business's value, not its changing stock price.
Integrity.
- We produce realistic valuations and will not buy an overvalued business for your portfolio.
- We invest our own money alongside our clients' funds.
Disciplined Valuation Techniques
Our investment process, through careful in-house research, unearths securities where there is a disconnect between the market price (which often fluctuates wildly) and the underlying long-term value of a business. We believe that price is not always indicative of value. That's why our equity process is centered around private market valuation techniques. Simply put, this means that we determine the price a rational buyer, paying with cash, would pay for an enterprise.
We invest in companies that are generally smaller and may be closely held, and that generate their cash needs internally. We prefer businesses that generate meaningful free cash flow, since this is an important characteristic of a good business and usually indicates a solid or improving balance sheet. In addition, free cash flow clearly increases intrinsic value and can be used to pay shareholders via buybacks or dividends. Companies with predictable free cash flow can also be valued with a higher degree of confidence than those with negative or uncertain free cash flow.
Disciplined Asset Allocation
A typical balanced fund contains part equity and part fixed-income. The equity portion is intended to generate capital appreciation, while the fixed-income portion is intended to provide an income stream. The fixed-income portion usually consists of U.S. Treasury securities laddered according to maturity.
With the Intrepid Capital Fund, the fixed-income portion is not restricted to any one asset class, such as U.S. Treasury securities. Instead, the Fund invests in whatever segment of the fixed-income markets the portfolio managers believe offers opportunity. The underlying rationale is the attempt to maximize total return-not just on a relative basis but also on an absolute basis. Comparison to the overall market is not enough; we insist on evaluating performance based on real results.
The Fund invests in high yield corporate debt securities. While Treasuries may be considered safe from a credit perspective, as an asset class they do not, over time, generate nearly as much income as do high yield corporate bonds. Treasuries and investment grade corporate bonds also incur more interest rate risk than high yield corporate bonds. Thus, through careful credit analysis, the Fund can offer added value to the U.S. Treasury market.
The investment strategy of the Fund's fixed income segment is to generate equity-type returns while taking below-equity investment risk, due to lower volatility and a higher position in the corporate capital structure.
Disciplined Investment Review
In evaluating a prospective bond investment, the Funds consider four aspects:
- Return: What is the present value of our future interest and principal payments, and what are we paying for them today?
- Risk: What is the likelihood that we will in fact receive those interest and principal payments, versus the likelihood that the issuer will at some point default instead?
- Liquidity: Will we be able to increase or decrease our position in the face of a change in credit assessment or distribution requirements?
- Relative value: What alternative opportunities do we have for investing our capital?
Free cash flow is a measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.